BUSINESS OPINION: It speaks volumes about the smugness of the Irish banking industry that it did not see Charlie McCreevy coming. The banks' claim to be stunned at the decision to introduce a bank levy - or Specific Contribution to the Exchequer from the Financial Sector - in last week's Budget is pretty amazing really.
The minister's own justification for the €100 million-a-year, three-year levy was quite succinct. He said that the sector has "proved its dynamism and business ability when given the chance" and that "it is not unreasonable to see some of their own good fortune applied to assisting the public finances". In case there are any bewildered bankers that have yet to come to terms with this outrage, here are 10 other reasons why they should cough up and stop whining.
Last Thursday the European Central bank cut its interest rates by half of a percentage point. As of the close of business on Friday none of the banks had passed on this reduction to their customers, or even indicated when they would be passing it on, or how much of it will be passed on. There is no justification for this. The banks can hardly claim that the ECB took them by surprise as their own highly-paid economists have been forecasting the cut for weeks. Over the next few days, if not weeks, the banks will grudgingly pass on as little as possible as slowly as possible. Contrast this with the speed with which retail rates go up once the ECB has moved. This brings us to our second reason.
The complete lack of competition in the Irish banking market is elegantly summed up by one statistic. In Britain there are something in the region of 120 mortgage lenders offering 4,500 products. In the Republic we have 12 players offering around 70 products. Put another way, the average British lender has around 37 products, while their Irish counterparts have six. The reality is that there is no competition in the Irish market, except in a few niche areas and as a result banking services and standards taken for granted elsewhere in Europe are the stuff of fantasy here.
The third reason is the Special Savings Incentive Scheme which has been gifted to the banking sector by Mr McCreevy. As is abundantly clear at this stage it is of no benefit to the State and will cost the Exchequer something in the region of €2.5 billion. For the banks it is just gravy, they have picked up billions of euros of business and hundreds of thousands of new customers who have put money into a range of saving products that are at best mediocre once the benefits of the Government incentive scheme are stripped out.
Reason number four. The €300 million or so that will be raised by the levy is a small price to pay for one of the most bank-friendly regulatory regimes in the developed world. Despite presiding over a series of the most appalling regulatory failures the Central Bank still sits at the top of a regulatory structure that puts the health of the financial system ahead of the interests of the public. The newly established Irish Financial Services Regulatory Authority is not exactly falling over itself to tick the banks off for not passing on last week's rate cut. This leads on nicely to reason number five.
The failure of the Central Bank's supervision was just one of a number of factors that allowed the banks to be willing conspirators in the biggest swindle ever perpetrated against the State. Millions of pounds were salted away in bogus non-resident accounts in the 1980s and 1990s. Only a fool would try to argue at this stage that the banks were not compliant in that fraud which indicates a complete moral vacuum at the heart of this most pompous of our "national institutions". The various banks have coughed up some €220 million in unpaid DIRT, but if they were subjected to the same penalties as you or I, the bill would be nearer €570 million. The difference - by coincidence - matches quite neatly the €300 million that the banks will have to fork out under the levy.
Reason number six is the enthusiasm which the banks have shown for the withdrawal of services from rural areas.
Reason number seven is the protection the banks enjoy from unwanted takeovers courtesy of the State. It is not possible for a bank to be taken over without the agreement of the Minister for Finance who must approve the transfer of the licence. If AIB or Bank of Ireland were facing an unwelcome suitor they would waste no time beating a path to McCreevy's door seeking help. They might bear this in mind before they expend too much effort trying to evade his levy.
Then there is Insurance Corporation of Ireland. In 1985 AIB discovered to its horror that its recent acquisition was in fact a hopelessly insolvent lemon. Rather than trade out of its difficult situation the bank instead was able to avail of its unique position in Irish society. Faced with a possible collapse of the banking system if AIB went under the government stepped in to rescue AIB and ICI at a cost to the taxpayer of €233 million.
Reason number nine is the currency crisis of the early 1990s. Irish banks weren't short-selling the pound? Yeah, right!
The final reason is the laughable amount of tax that the banks pay on the profits they squeeze out of the Irish market. According to its most recent annual report Bank of Ireland paid €165 million in tax on profits of just over €1 billion. This is an effective tax rate of 15.2 per cent. AIB's effective tax rate was 23.6 per cent on its profits of €612 million, according to its 2001 annual report. This suggest a figure of €121 million being handed over to the Exchequer. However, the actual figure was €55 million - no doubt due to some astute tax planning. This figure represents nearer 9 per cent of its 2001 profits. The figure will be even lower this year as corporation tax comes down once again to 12.5 per cent. Compare this to Barclays and HBOS in the UK who pay 30 per cent corporation tax.
